Ukraine Crisis and Refugee Costs

Written by

Hugo Petitjean, Maura Kitchens West

Published on

May 6, 2022

The Ukraine crisis has led OECD DAC donor governments, particularly in Europe, to reprioritize their spending in three key ways:

Support for Ukrainian refugees: Donors are providing humanitarian assistance and preparing to host refugees, leading to increased humanitarian spending and in-donor refugee costs (IDRCs);
Increased defense spending: Several governments have called for increased defense budgets in response to the invasion of Ukraine, which could impact the overall flexibility of some donor governments’ budgets, particularly considering the COVID-19 pandemic; and
Preparation to support Ukraine’s reconstruction: EU leaders have announced the Solidarity Trust Fund to help finance Ukraine’s post-conflict reconstruction, which is expected to take hundreds of billions over several years.

Unless otherwise indicated, conversions were carried out using the OECD’s April 2022 conversion rates.

On February 24, 2022, after months of military build-up at its borders, Russia launched a full-scale military invasion of Ukraine by air, land, and sea. Russia hit cities across the country, including the capital Kyiv, with missiles; Russian troops breached Ukraine's eastern borders in the Chernihiv, Kharkiv, and Luhansk regions; and Russian military personnel arrived by sea in Odesa and Mariupol in the south. This intense and sudden onset of violence almost immediately resulted in the mass movement of people seeking safety. In the first 48 hours of the invasion, news reports suggested that 50,000 people had already fled the country.

After more than 10 weeks of fighting, people continue to flow across Ukraine's borders into neighboring countries. As of May 5, 2022, the United Nations High Commissioner for Refugees (UNHCR) estimates that 5.8 million refugees have left Ukraine. The majority of refugees have fled to neighboring countries like Poland (3,143,550), Romania (856,941), the Russian Federation (727,712), Hungary (551,010), the Republic of Moldova (452,038), and Slovakia (391,592). Poland, Hungary, and Slovakia are EU member states in the Schengen Area. Anecdotally, it appears as if many refugees are staying in Ukraine’s neighboring countries, but Ukrainians can travel freely within the Schengen Area; we do not have reliable data on onward travel and settlement within Europe and beyond as not all Ukrainian refugees are registering with authorities.

This Donor Tracker Insight explores how the crisis in Ukraine might change the spending patterns of Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) donors.

IDRCs as humanitarian assistance

In addition to direct humanitarian assistance to Ukraine for immediate needs like medical supplies and resources for internally displaced people, European countries can count in-country refugee costs toward total ODA spending. The Centre for Global Development (CGD) estimates global in-country refugee costs could amount to US$30 billion a year, equivalent to total bilateral assistance to Africa in 2020.

Based on the OECD DAC reporting directives, DAC members can count the costs of assisting refugees in donor countries as ODA for the first 12 months; the directives highlight that refugee protection is a legal obligation and that providing assistance to refugees may be considered a form of humanitarian assistance. The OECD’s 2017 directives include "refugees, recognized refugees or beneficiaries of international protection, temporary protection or subsidiary protection, asylum-seekers or asylum applicants" as refugees; rejected asylum-seekers and in-transit refugees are not considered refugees, according to the reporting directives. ODA-eligible expenditures include expenses for temporary sustenance (food, shelter, training, basic health care, etc.), voluntary repatriation costs, transportation, and administrative costs.

In 2015, in response to the large number of refugees that entered Europe due to the Syrian conflict, 10 members of the OECD DAC reported in-donor refugee costs between 10% and 34% of total ODA. According to this analysis by the OECD, seven of 28 DAC members used their development budgets to finance in-donor refugee costs in 2015, causing direct tradeoffs with development priorities. 13 of 28 members reported funding from other ministries (e.g., Social Affairs or Interior Ministries) as ODA, causing indirect impacts across ministries (including development spending) and within the overall government budget. This led to the controversy around whether these costs should be reported as ODA. Similar behavior will likely be observed in response to the large number of refugees fleeing the Ukraine conflict and heading toward the Schengen Area. If members use ODA to cover in-donor refugee costs for refugees from Ukraine and do not increase their ODA budgets accordingly, fewer resources will be available for development cooperation activities in partner countries.

Figure 1. In-donor refugee costs, DAC donors total, 2011-2021

In-donor refugee costs amounted to USD 9.1 billion in 2021 (constant prices), practically unchanged in real terms compared to 2020 and representing 5.2% of DAC member countries’ total ODA. In real terms, ODA volume for in-donor refugee costs has nearly halved since its peak in 2016 where it amounted to US$17 billion and represented 11.0% of total ODA.

Figure 2. DAC Donors ODA for in-donor refugee costs, 2021

In 2021, Germany was the largest providers in absolute terms of ODA for in-donor refugee costs (US$2.7 billion or 9% of total ODA). Australia, the EU Institutions and Luxembourg did not report any ODA for in-donor refugee costs in 2021.

2022 IDRCs estimates

The Russian invasion of Ukraine has caused an unprecedented number of refugees to flee directly to Europe; major OECD DAC donors, who normally take in relatively smaller numbers of refugees, could be inclined to dedicate ODA to in-country refugee-hosting costs. The following countries were chosen as part of this study due to their expected likelihood of hosting large numbers of refugees due to their proximity to the crisis in addition to their ODA contributions. The number of expected refugees for each donor and the average in-country cost per capita per year to support refugees provided by donor countries to the OECD were used to estimate in-country refugee costs that will count towards ODA.

Table

Highest predicted impact:

Currently, the most immediate impact of in-country refugee costs due to the Ukraine crisis can be observed in the Nordics, where funding to host refugees from Ukraine coupled with humanitarian assistance, has already been reallocated from the development budget, halting other programs.

Sweden: The Swedish government has officially estimated refugee costs of US$1.2 billion to US$3.6 billion, which will primarily be financed through deductions from the development assistance budget. There will be significant tradeoffs for development activities in Sweden to respond to the crisis in Ukraine.
Norway: Norway plans to reallocate US$416 million from the existing ODA budget to in-donor refugee costs in support of Ukrainian refugees. This funding pulls from budget items aimed at humanitarian efforts in low- to middle-income countries, drawing criticism from development advocates and multilaterals. In addition, Norway temporarily suspended Norad development payouts to multilaterals to evaluate the crisis, but payments have resumed. Norway intends to maintain ODA capped at 1.0% ODA/GNI.
Denmark: In Denmark, US$300 million of allocated ODA has already been reprogrammed to support Ukrainian refugees, according to a government announcement. Development funding for other partners will see cuts.
Netherlands: The Netherlands will likely reallocate funding from the development budget to support in-country refugee costs, creating considerable tradeoffs between the response to the Ukraine crisis, and other development programs financed by the ODA budget. However, there are ongoing discussions on ways to reduce the ODA- in-country refugee cost tradeoff.

Medium-low predicted impact:

Germany: The German government approved a draft supplementary budget on April 27, 2022, worth €26.3 billion (US$29 billion) with additional funding amounting to €1.0 billion (US$1.1 billion) for the Federal Ministry for Economic Cooperation and Development (BMZ), both to support Ukraine directly and to mitigate the consequences of the invasion for low- and middle-income countries and emerging economies. The subsequent draft 2022 budget showed that increased COVID-19 pandemic and Ukraine crisis funding caused cuts to other areas like the Global Fund to fight AIDS, Tuberculosis and Malaria and the Global Financing Facility. Roughly half of the additional funds will attempt to address the mounting global food crisis due to export restrictions; the budget is expected to be approved in early June 2022. Most in-country refugee costs will come from the federal budget through the Hartz VI welfare program, which is additional support and will likely not have concerning tradeoffs with the development budget. Ukraine has also become a major focus of Germany’s G7 presidency.

Unclear potential impact:

France: Funds for in-country refugees will possibly come from additional budgetary measures, including from federal ministries, so it is possible that there will be low competition between the response to the Ukraine crisis and the ODA budget. However, there could be inflation of ODA levels towards the 0.7% ODA/GNI target.
UK: The UK intends to maintain the recently imposed 0.5% ODA/GNI cap due to the economic impacts of the COVID-19 pandemic. The UK response to the crisis in Ukraine will include both reallocations and additional funding. Parts of funding will come from the development budget while others will be deducted from additional ministerial budgets. There will be increased competition for development activities in the UK due to the crisis in Ukraine, residual impacts of the COVID-19 pandemic, and the UK’s decision to cap its ODA at 0.5% of GNI – a move that has been heavily criticized by development experts.
Italy: The budget to support refugees in Italy will possibly be additional and come from other ministerial budgets, so there could be low competition between the response to the Ukraine crisis and the ODA budget. However, there will likely be inflation of ODA levels.
Spain: Funds for in-country refugees in Spain will potentially come from additional budgetary measures, including from federal ministries, so there could be low competition between the response to the Ukraine crisis and the ODA budget. However, there could be inflation of ODA levels towards the 0.7% ODA/GNI target.
EU: Relative to other donors, not all refugee and humanitarian spending will be ‘traded off’ against ODA within the European Union. €3.4 billion from REACT-EU (EU regional cohesion funds) will be allocated to meet costs associated with the refugee inflow.

Other humanitarian spending

In addition to in-country refugee costs, donors have committed to providing Ukraine with humanitarian assistance funding, which addresses basic needs like food assistance, healthcare, etc., Among the largest donors are the EU, US, UK, and Germany; the EU has provided two packages of humanitarian funding, totaling €330 million (US$356 million) and €500 million (US$540 million), respectively. While the US has pledged US$13.6 billion in support to Ukraine, the exact amount directed towards humanitarian funding remains unknown; however, experts predict that around US$2.7 billion will be spent on humanitarian assistance efforts. The UK has provided £400 million (US$517 million) in total support, of which at least £145 million (US$187 million) will be humanitarian funding directed to serving the most vulnerable. Germany will boost humanitarian assistance to Ukraine and neighboring states to more than €370 million (US$407 million) and will offer an additional €430 million (US$464 million) to fight a potential hunger crisis. In addition to direct humanitarian funding to Ukraine, donors are also mobilizing funds for neighboring countries like Moldova and Poland to host large numbers of refugees.

Defense spending

Several governments have announced or called for increased defense budgets in response to the invasion of Ukraine. Increasing defense spending could impact the overall flexibility of some donor governments’ budgets, particularly considering recent budget constraints due to the COVID-19 crisis. Many countries have already pledged or are attempting to configure their budgets to spend 2% of GDP on defense spending, in line with NATO’s hitherto unenforced requirement. (Australia, Germany, Italy, Japan, and Spain). The UK, US, and France have ramped up spending but had already met the 2% GDP target.

German Chancellor Olaf Scholz plans to enhance the German military, pledging €100 billion (US$112.7 billion) of the 2022 budget to the armed forces. Additionally, Sweden – historically militarily neutral - has increased defense spending by 40%, adding SEK27 billion (US$2.8 billion) to the defense budget from 2021 – 2025, and seeks to align with NATO countries by spending 2% of GDP on defense. Surprisingly, Pacific-region donors like Japan and Australia, despite their physical distance from the conflict, also significantly upped their defense budgets, citing increasingly unpredictable geopolitics due in part to the Russian invasion of Ukraine, but also as posturing against ongoing perceived aggression from China.

These planned increases in defense budgets could restrict resources for national governments to devote funding to development as well as interior ministries to support incoming refugees. Advocates should encourage donors to refrain from slashing development budgets in favor of defense.

Preparing for reconstruction

Estimates for post-conflict reconstruction of Ukraine vary, but all amount to at least US$250 billion in expected costs pending the duration of the conflict. Some figures estimate closer to US$600 billion or even US$1 trillion in damages. Ukraine’s pre-conflict GDP was only US$155.5 billion, meaning reconstruction efforts will take decades.

The European Council announced the creation of a Solidarity Trust Fund to support Ukraine at the High-level International Donors’ Conference for Ukraine on May 5, 2022. The Fund intends to support Ukrainians with recovery from the conflict. European Council President Charles Michel highlighted the Fund’s three key areas of support: 1) humanitarian, 2) liquidity, and 3) reconstruction. The trust will be managed by the European Commission and will draw on EU budget guarantees; however, depending on the needed size of the financing, additional donations could be required from EU member states or G20 countries. Officials have stressed that the majority of funds will need to be supplied as grants rather than loans to avoid long-term debt stress. The Fund will also involve the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development. In addition, donors have contributed to the Zelensky-initiated United24 Fund, a fundraising platform, which serves as the main venue for collecting donations in support of Ukraine. The funds are used for 1) defense and demining, 2) medical aid, and 3) rebuilding Ukraine.

With donors increasing pledges and support for Ukraine, advocates should encourage donor governments to supplement reconstruction efforts with new and additional funding to ensure that development budgets for other partner countries continue to receive enough support.

Next steps for advocates

Advocates should be prepared to face increasing competition within some, but not all, donor budgets for development assistance as countries squeeze responses to the crisis in Ukraine into their current development budgets. There should be a continuous effort to push donors to improve the quality and quantity of ODA, and specifically discourage the reallocation of development budgets from low-income countries, which need stable development contributions. Advocates should ensure that donors carefully consider how they track ODA-eligible in-country refugee costs, which reduce the amount of effective development assistance globally. Similarly, advocates should ensure that development budgets are safeguarded from cuts in favor of increased military spending. Stressing the importance of creating new and additional funding to respond to the Russian invasion of Ukraine is paramount for maintaining the efforts of development advocates; without applying these aims, we will likely see other sectors and countries cut from priority development allocations over time.